Effects of Liquidity Constraints, Risk and Related Time Effects on the Adoption of Perennial Energy Crops

Abstract

This chapter highlights the crucial role of liquidity, risk, and related time effects in explaining farmers’ willingness to grow perennial energy crops as a renewable energy source. I first review the scarce empirical evidence from surveys and focus groups about how liquidity constraints hinder adoption, and present additional results from simulation approaches based on optimization models. Then, I evaluate the extent to which perennial energy crops can be considered as a risky enterprise, and emphasize the importance of assessing risks at farm level to uncover potential diversification benefits. I also show how time considerations generate further related issues, due to intertemporal fluctuations in the income stream, investment irreversibility, and land reallocation. This chapter also highlights relevant policy and contract schemes to overcome the barriers to adoption described above. Establishment grants and cash advance systems are widespread and efficient ways of limiting liquidity effects on adoption as long as moral hazards are managed and conversion back to conventional crops is discouraged. Risk barriers are mostly managed through private long-term production contracts between farmers and biomass processors.